Basel Committee Analyzes Impact of Technology Innovation

The Basel Committee on Banking Supervision released a consultative document in August on the implications of fintech for the financial sector. The report assessed how technology-driven innovation in financial services may affect both the banking industry and its supervisors, and asks for feedback on "10 key observations" about the fintech trend and related recommendations for banks and bank supervisors. The report included three case studies focused on technology developments (big data, distributed ledger technology, and cloud computing) and three on fintech business models (innovative payment services, lending platforms and neo-banks). The report also described some of the ways in which bank supervisors have responded to fintech, including the formation of accelerators and sandboxes.

"The emergence of fintech is only the latest wave of innovation to affect the banking industry. Banks have undergone various technology-enabled innovation phases before," the Basel Committee noted. "However, the rapid adoption of new technologies along with their effect in lowering barriers to entry in the financial services market has fostered the emergence of new business models and many new fintech entrants. These factors may prove to be more disruptive than previous changes in the banking industry."

The 10 areas where the Basel Committee offered observations and recommendations are: 

1. the overarching need to ensure safety and soundness and high compliance standards without inhibiting beneficial innovation in the banking sector;
2. the key risks for banks related to fintech developments, including strategic/profitability risks, operational, cyber and compliance risks;
3. the implications for banks of the use of innovative enabling technologies;
4. the implications for banks of the growing use of third parties, via outsourcing and/or partnerships;
5. cross-sectoral cooperation between supervisors and other relevant authorities;
6. international cooperation between banking supervisors;
7. adaptation of the supervisory skillset;
8. potential opportunities for supervisors to use innovative technologies ("suptech");
9. relevance of existing regulatory frameworks for new innovative business models; and
10. key features of regulatory initiatives set up to facilitate fintech innovation.